Value Stock Investing seeks to provide undervalued stocks ideas in US & Singapore.
Price is what you pay. Value is what you get.
Rule No.1: Never lose money. Rule No.2: Never forget rule No.1. - Warren Buffett
Please bear in mind that ALL ideas, opinions, and/or forecasts are for informational or entertainment value ONLY and should NOT be construed as a recommendation to invest, trade, or speculate in the stock market.

Saturday, October 19, 2013

During the early morning of Oct. 16, 2013, Chairman of Berkshire Hathaway, Warren Buffett appeared on CNBC for a few hours with Becky Quick. There are a series of video clips posted below as well as a full transcript.

Buffett sounded fairly optimistic on CNBC noting he had made a billion-dollar acquisition this morning in the UK and also noting that it is not a mistake to buy stocks now, reaffirming stocks are not selling at “bubble” valuations. Buffett also weighed in on Carl Icahn’s proposed Apple (AAPL) buyback as well as FED policy, the debt ceiling, the future of J.C. Penney (JCP) and a few other things of interest.

Transcriptt's a perfectly okay debt to buy securities. We bought a $1 billion business about five hours ago. i think over at the uk. and we did not buy it with a condition in it that we could call off the deal if there was a no vote on the deficit change. limit change. so if you can own a good business, a good farm, a good apartment house, you know the united states is going to be around five or ten years from now and you know it will be more prosperous. it's not necessarily a mistake to buy stocks because you don't know the outcome of something that's happening in congress. that's a great long-term view. and your view has always been no matter what happens, we will get through it. we got through the great depression. we got through world war ii. but what about the immediate? people are really concerned about what's happening in washington right now. it's a mess. and if you think about it, i used to tell my children when they were young, it takes 20 years to build a reputation and 20 minutes to ruin it. we've been building a reputation for 237 years. the united states has become the reserve currency in the world in the process and people all over the world hold our paper. so to do anything to damage the 237 years of good behavior is idiotsy. i don't think it will happen. but if it does happen, it's a pure act of idiotsy.

i am fought worried in the sense of those treasury bills being paid. i'm worried about damage to an asset that we carefully cultivated for years. those short-term treasury bills, though, the rates have spiked on them, especially in the last couple of days. bill gross said he's a buyer over at pimco. are you? they've spiked, but you're talking about going from zero yield to 35 basis points. but 35 basis points for three or four days does not amount to a bunch of -- in other words, you're not scraping for cash? i've got better things to have had although that date looked pretty good. have you changed anything you've done at berkshire as a result of what's been happening in washington? no. we have been at a derth when it comes to getting any signs of the economy, any reading on what is happening because you don't have any economic numbers coming out. you have a lot of numbers coming out every day. in your opinion, has the u.s. economy been hurt by what's been happening in washington and does it show up in your receipts? it has not shown up. but what will show up is in the world, united states citizens lose some faith in the full faith and credit promise of the united states. that would be a momentous event. even if we said, well, we're slowing it for a week or we're putting out script or whatever, that would be huge. we have been spent 237 years building up our reputation for billing our bills on time.but 1% real gdp growth per capita over a long period of time, it does wonders. are you telling us that we need to get used to this or is this a temporary rare thing and we're going to get back to what we used to expect? i don't know. i think it's very possible we get back to higher rates of growth, but i will tell you that this is not a disaster. i mean, if you -- just think about each generation living 20% better than the generation before them. that is not terrible. it's not terrible and it's not a disaster. but if you're looking for 3% versus 3.5% growth versus what whooefb getting, you're fought going to have the problems we've been dealing with today in washington. that takes care of itself. it takes care of itself unless we start making new promises. we tend to make big promises. we're like a very, very, very rich family and then we don't stop getting rich at quite the same rate. but our promises, we just went

The country should have a "sustainable path," says Warren Buffett, Berkshire Hathaway chairman & CEO, but Congress should "fight it out" without putting the nation's credit at risk.

issues. what's going on at benjamin moore now? we heard an employee was you fired. benjamin moore has been around over a hundred years. i made a promise to the dealers that we were going to stick with that and would not go with the big boxes. meaning the home depots and so on. that was enormously important. i did a video so there wouldn't be any question. i found we were about to sign with one of the big boxes. i had to make a change. we have a commitment toll to the dealers. we take care of them; they take care of us. i encouraged who was put in. recently we had to make a change for a reason i can't get into.

basically i'm buying businesses and bank stocks for that matter in terms of what's going to happen in the future not for what's happened in the past. i can go back with bank of america. i read a book 55 years ago. i can go back to the san francisco earthquake. they thought it was a down day and turned out to be a good day for bank of america. what really counts is the future. in the future, banks will have to carry, particularly larger banks are heavier capital. banks are in the best shape i can remember. they've built up capital enormously. portfolios are in good shape. big problem they have now is getting out more money. they have more money around than they would like. they are not reluctant to loan.

speaking of investors, let's see a what carl has been saying to apple. what do you think about his requests or demands to buy back the incredibly large church of stock? the apple management did a nice job running the company. i wish i bought the stock years ago. i did advise the stock years ago. they've got a lot of money that's not trapped over seas. they'd have to pay a big tax to bring it back. they hope for free trade at some point so they won't have to pay the tax. carl is suggesting they borrow money to buy back the big chunk of stocks. companies have done that including coca-cola. they're buying in stock. i've got -- i think the apple management and directors have done a good job running the company. i vote with them. versus what carl is saying? i do not think that companies should be run primarily to please wall street and largely shareholders going to sale. i prefer shareholders going to

do you agree with that opinion. i have no idea. the economy has been getting better. how they make a decision on whether to pull back -- it doesn't enter into my thinking. i'll put it that way. ben bernanke did make comments after the last fed meeting and said the trouble in washington was the reason they were standing pass for now. obviously he was right. look at what happened since then. at this point you try to figure out what pd in washington will have a serious impact on the economy. you haven't seen it in ub ins, but what's your guest in terms of if we were to get a resolution by the end of the week, how big the impact would be on the economy? if they get a resolution today, i think opinion of congress still will have diminished significantly. i don't think that will change the world or certainly won't change the people's feeling about the reserved currency. what would do the job, both parties say this is a weapon of mass destruction. we're not going to use it. we'll fight in trenches but not going to blow up the world to get our way. that doesn't sound like conventionalism in washington.

JCP - supplier in many respects. fruit of a loom. and also supply jewelry to them. there's a lot of questions about the health of the company. you as a former retailer yourself in the department store and now somebody that has a lot of retail business, you've been watching this. what do you think about what's been happening? it's very tough. the trouble with retailing is the competitor is always moving. getting your act together which they're doing is important. at the same time all others keep moving. it's just very tough. i have this huge rooting interest. i worked there when i was 16 selling shirts $1.98. i sold men's clothing, childrens and i loved it. i have always loved the company. it's tough to run it. of course when you have to do something like selling out whether 38% or a large number of shares it makes it very tough. coming from behind in retail is very tough.

the stock market compared to most asset classes in my view is the most attractive place to have your money over the next 20 years. over 20 days or 20 weeks i don't know. we have our money in businesses. we all all of some businesses, parts of some. we call those stock. we think that's where value lies. we had mark as a guest on the show yesterday. he laid out the argument about just by looking at formulas, playing the averages, that we are due for another correction at some point. you never know when or how that's going to happen. it was an argument for not getting caught up in the euphoria of the market and making sure you were diversified. do you think we've reached the stage in this market people have to worry about bubble levels? no. we could at some point. no. stocks are not selling at bubble levels. i think it's a terrible investment compared to equities. so you're going to have your assets in something. good businesses held for a long period of time are certain to deliver good results from this

Monday, October 14, 2013

I read this article on last Wednesday's Business Times and thought that this is a great article to share with everyone. Given that the market has risen for the past 3-4 years, there are lesser and lesser bargains in the market. When there are lesser opportunity to invest money, probably a good way is to hold on to cash. Though the cash is not earning any returns while it sits idle, it would come in real handy when the market retreat and bargains start to surfaceBelow is the article from Norm Alster.JITTERY investors see danger in every market thrust upward. For them, soaring stocks aren’t confirmation that the future looks bright. Sustained market gains seem more like evidence that optimism has been hijacked by delusion and greed, and due in time to be exposed and reversed.

With the Standard & Poor’s 500-stock index up almost 18 percent over the first nine months this year, the skeptical and fainthearted can choose from a bulging bag of protective hedges. They can short stocks individually or the market as a whole. Some inverse index funds and exchange-traded funds are leveraged to triple any move, providing outsize profits in a market slide, but enormous risks should the market keep marching higher.

Still, for most fund managers, there is a time-tested, less risky way to protect against overexposure to an overextended market. By holding cash instead of stocks in part of their portfolios, they can cushion any fall and save ammunition to buy again when stocks are cheaper.

Many fund managers have quietly been raising their cash positions. In their latest reporting periods, according to Morningstar, the average equity mutual fund held 9.7 percent in cash, up from 8.8 percent in the previous three-month period.

Some managers are sitting on much more cash than that. John Deysher, manager of the Pinnacle Value fund, has 44 percent of his portfolio in cash. But for managers like him, not being fully invested has a price. Though Pinnacle Value is up for the year, it has lagged behind the S.& P. 500. Mr. Deysher is unfazed.

For one thing, Pinnacle Value has outperformed the S.& P. 500 over the last decade. And Mr. Deysher would sooner lag behind the market than bend the buying discipline of the fund.

“Our job is to seek out fundamentally undervalued stocks, and if we can’t find any, we’ll let the cash build,” he said. “It’s been difficult for deep value investors like us,” he added. “There’s just not a lot of merchandise.”

For Mr. Deysher, capital preservation is paramount. “We’d really like to put the cash to work but not at the risk of potential capital loss,” he explained.

But Bruce Berkowitz, who manages several Fairholme funds, goes much further in outlining the merits of stockpiling cash.

“I believe holding above-average amounts of cash leads to above-average performance,” Mr. Berkowitz said. His Fairholme Allocation fund, which now holds 14.8 percent in cash, has outperformed, soaring almost 34 percent in the first nine months this year.

Having cash on hand can be the difference between getting in on the best buying opportunities, or missing out, Mr. Berkowitz reasons.

These opportunities typically arise when markets have sold off and many managers must sell to meet redemptions from fund shareholders. “Having that cash allows a portfolio manager to buy when most do not have the cash to make investments,” he said. It also allows a fund manager to meet redemptions without having to sell stocks that still have “huge performance potential.”

“Cash can be extremely valuable — especially when no one else has it,” Mr. Berkowitz said. “Cheap purchase prices are usually created when most funds are being forced to sell.”

A case in point: “All the companies I’ve invested in in the past three years were dramatically affected by the real estate bubble,” he said. Recoveries in the shares of the American International Group and Sears Holdings have produced big gains for the Fairholme funds.

But some question the value of trying to time market moves. “Evidence suggests that market timing is incredibly hard,” said Michael Abata, a manager of the Invesco Low Volatility Equity Yield fund. “If you can do it, it’s potentially powerful — but incredibly hard to do.”

Mr. Abata does not try. The Invesco fund now has less than 2 percent of its assets in cash. With investors buying and selling shares of a fund, that is close to being fully invested. The fund managed an advance of nearly 17 percent in the first three quarters of the year.

Though he does not hedge with cash, Mr. Abata is adjusting his strategy to the realities of a market that is becoming “increasingly expensive.” He is shifting portfolio weightings toward stocks that tend to have less volatility. He recently bought shares of AT&T and Verizon. He has reduced his position in First Solar, which tends to be a more volatile stock. What would Mr. Abata do if investors started bailing out of the fund during a sharp market correction? “If we were being redeemed, we’d sell off the less attractive holdings — those that don’t have as high an expected return,” he said.

Some mutual funds require fund managers to stay fully invested. Sometimes, large investors in a specific fund stipulate that the fund avoid holding cash, said Will Browne, a manager of the Tweedy, Browne Global Value fund. “There are certainly institutional accounts that give you money and say, ‘I want you to be fully invested.’ ”

But Mr. Browne, whose fund holds nearly 17 percent cash, said he “pushes hard” against such demands. He said he preferred to buy companies at prices that are lower than what an informed buyer would pay in an acquisition. If he cannot find them, he said, he is prepared to “lag behind” market returns for a while.

One fund manager who is still finding stocks to his taste is Richard S. Nackenson, of the Neuberger Berman Multi-Cap Opportunities fund. Mr. Nackenson has been nearly fully invested, retaining slightly more than 2 percent of assets in cash.

“We’re not required to be fully invested,” he explained. “We are choosing to be fully invested in this market because we’re finding high-conviction ideas. Many of these are companies that are showing growth in current and future cash flow.”

Such cash flow growth is appealing, as it can finance investor-friendly initiatives like dividend increases and share buybacks. Mr. Nackenson said he liked the free-cash-flow growth potential of Boeing, a long-term holding to which his fund has added shares recently.

Bargains seem to be in the beholder’s eyes. Unlike Mr. Nackenson, Kimball Brooker Jr. doesn’t see many now. The FirstEagle Overseas fund, of which he is a co-manager, has a hefty 23.1 percent of assets in cash. “We’re lagging the indices,” Mr. Brooker acknowledged, emphasizing that his first goal is “not to lose money.” “We’re just being very patient,” he said.

He sees most global markets as fully valued, a somewhat uncommon situation. “It’s unusual to have synchronous full valuation around the world,” he said.

Has Mr. Brooker heard complaints from disappointed investors? “Not yet,” he replied. “For the moment, 2008 and 2009 are still in the psyches of many investors,” he said. “There’s some appeal to a strategy that will protect them on the downside.”

Saturday, October 12, 2013

Stocks have moved a long way in five years, making it a challenge for the world’s best living investor to find undervalued situations. “[Stocks] are probably more or less fairly priced now. We don’t find bargains around,”Warren Buffett told CNBC last week. “But we don’t think things are way overvalued either. We’re having a hard time finding things to buy.”

Perhaps Buffettwill elect to purchase more of some of his current holdings. One such current holdings is Coke [KO]. Buffett has a 9% stake, or 400 million shares, which comprises 18% of his portfolio and makes him the company’s top shareholder. Buffett appeared at Coke’s annual meeting in April and said he would “never sell a share of Coke stock.” Coke shares have declined 2% over the past year, to a price of $37.77 on Thursday, which is 6.1% above their 52-week low of $35.58.Coke has recorded annual revenue growth of 10.9% and annual EBITDA growth of 9.6% rates over the past 10 years, and 13.8% and 9% respectively over the past five years.

With the decline in price, Coke has also caught the attention of another value investor. David Winters, CEO of Wintergreen Advisors, explains why Coca-Cola is his favorite stock in the U.S. “You can get rich if you’re patient” he says in the video below.

Friday, October 11, 2013

This is an excerpt of article which appeared in the Edge on 29th April 2013

Family-controlled Lum Chang Holdings does not attract much attention in the market. Yet, the decades-old contractor is an interesting play on Singapore’s property and infrastructure boom. And, its dividend of two cents per share provides investors with a steady dividend yield of about 6%. Its market value of just $123.8 million is currently a 28% discount to its book value of $173.2 million. The company also has a liquid balance sheet, with a net cash position of $33 million as at end-2012.

Much like other contractors, Lum Chang has taken stakes in property development projects. For instance, it has a 30% stake in Twin Fountains, an executive condominium (EC) development in Woodlands. The remaining stake is held by Frasers Centrepoint. The project was sold out swiftly earlier this month. The company also has a 20% stake in another joint venture with Frasers Centrepoint to develop Esparina Residences, an EC located in Sengkang that is due to receive its temporary occupation permit (TOP) at end-2013.

The company’s forte lies in the construction of commercial buildings. They do a lot for companies such as Ascendas and LaSalle [Investment Management]. LaSalle was the partner in some projects such as Twenty Anson which was a joint venture. Lum Chang took a minority stake in Twenty Anson and constructed the building. In March last year, LaSalle and Lum Chang sold Twenty Anson to CapitaCommercial Trust for $430 million.

Lum Chang’s share of the profit was $6.3 million. Lum Chang was also the contractor for Crowne Plaza hotel at Changi Airport, a development that was owned by LC Development and a fund managed by La- Salle. LC Development is linked to the family that controls Lum Chang. The hotel was sold to Overseas Union Enterprisefor $299.5 million in 2011.

Lum Chang’s construction order book stood at about $600 million as at Dec 31. Its ongoing property development-related construction work comprises six projects. Two of these projects are for Ascendas: Nucleos in Biopolis Road and a business park development in Science Park Drive. Lum Chang is also building The Metropolis for Ho Bee Investment at Biopolis, Ripple Bay Condominium for MCL Land in Pasir Ris, and Esparina Residences.

RIDING THE MRT EXPANSIONLum Chang’s largest project is the $450 million contract (officially named C912) to build an MRT station and a 1.8km cut-and-cover tunnel for Downtown Line Phase 2 in the Bukit Panjang area. The station will be largely underground with two basement levels and provisions for future underground pedestrian walkways to adjacent developments.

Lum Chang is trying to secure more MRT-related work but competition is stiff. Notably, the company tendered for a few projects for Downtown Line Phase 3 (DTL3), but failed to secure any work. “We found that if we tendered for standard stations, we were competing with a lot of players who could do it for less,” Fong admits.

In the meantime, Lum Chang is also looking into bidding for other types of infrastructure-related work, such as roads and highways. “We did the water reclamation plant at Changi. That is the deepest tunnel we have done,” Fong adds.

MALAYSIAN PROPERTY ARM

Credit: Bloomberg

Lum Chang also has a foothold in Malaysia, where it develops property. They are exploring the KL MRT project at the moment. The company’s main project in Malaysia is a 125-acre plot of land in Cheras on which it is developing landed property in phases. It’s about 600 units and just over RM1 billion [$407.7 million] worth of development.

The company also owns 30 acres in an area called Kemensah, just north of Zoo Negara, which is being developed into luxury bungalows.

Interestingly, Fong, executive director of Lum Chang, says profit margins for property development projects in Malaysia are higher than in Singapore. “Land is much cheaper; construction is cheaper in Malaysia than in Singapore,” Fong says. However, under its accounting policy, the company does not recognise revenue and earnings from its property development interests in Malaysia and its EC developments in Singapore. “We’ve got to wait till TOP,” Fong says.

Hence, Lum Chang’s reported revenue and earnings tend to be lumpy. For 1HFY2013 (the company has a June year-end), it reported a 202% rise in revenue to $67 million and a 220% jump in earnings to $12.1 million. Fong says this was because of the completion of certain phases of its projects, but warns that the same level of revenue and earnings might not be achieved in 2HFY2013.

“The nature of our business is project-based, so profits and revenue have a lot do with accounting policy,” Fong says. “And, it’s a bit lumpy in terms of profits because it depends on when projects finish.” Another uncertainty for investors is labour costs as the government tries to scale down the import of foreign workers, he adds.

LONDON INVESTMENTTo improve stability of income, Lum Chang made a property investment earlier this year. In February, it said it had bought property located at 42-60 Kensington High Street, London for £40.19 million ($76.8 million). “Our income will be mainly from the ground floor, achieving rental income from shops such as Zara, Topshop and Miss Sixty. The leases there are very long, 10-year leases and these will provide a good steady income,” Fong says.

The yield of the London property works out to 4.5%, giving an annual income of $3.4 million, according to a report by UOB Kay Hian. That is about 15% of the company’s earnings for FY2012. “We’ve always been project-based, either property development or construction,” Fong says. “We felt we should go for another line of business that could generate sustainable income.

Fong says Lum Chang is now looking for more ways to expand its recurring earnings base. “We are open to diversifying,” he says, adding that the company is already looking at one interesting project. “The operations would allow us to receive sustainable income for decades,” he says, declining to provide more details. Another opportunity Fong sees for Lum Chang is the refurbishment of old commercial buildings.

“A lot of old commercial buildings are looking tired. Instead of tearing them down, landlords are building extensions. We could be involved in doing that,” he says.

Lum Chang has paid a dividend of two cents per share for the last three financial years. “Our shareholders are usually the older generation who have been holding [our shares] for years and they want regular income,” Fong says. In fact, the dividend payout was raised from 1.5 cents per share to two cents in FY2010. “We felt our profits had stabilised and two cents is something which is quite achievable and sustainable over the medium term,” Fong says.

Lum Chang does not have much of a following among analysts, though. However, UOB Kay Hian notes that the stock appears to be inexpensive. “Trading at 0.8 times price to book looks reasonable when compared with peers’ average of one time,” the brokerage states in a report. “Since FY2010, Lum Chang has maintained a net cash position. Its stock price is underpinned by cash reserves of $77 million as at Dec 31, which accounts for 62% of its market cap.”

Amid the hunt for yield, Lum Chang seems a good alternative to real estate investment trusts and consumer-oriented stocks that have run up sharply over the last couple of years. The company has maintained its dividend payment of 2 cents over the last 3 years and it has increased its revenue and profit

Based on the S&P report on Lum Chang, LCH’s order book currently stands at SGD474 mln. Construction sector outlook remains sanguine as the Government continues to accelerate infrastructure spending to keep in line with population expansion. This is a stock with good dividends and at the same time allow investor to participate in the growth of the construction sector

Sunday, October 6, 2013

Sometime back I happened upon a book by T.Harv Eker
called ‘Secrets of the Millionaire Mind’. The book is
basically about how your thoughts can affect the amount of money or abundance
you receive in your life, and in my personal opinion, it is an excellent read. He
was here in Singapore in March 2013 for Millionaire Mind Intensive seminar and
is coming again in November 2013.

I know there are a lot of skeptics who debunk
the idea that we create our own world by our thoughts, but I am interested
enough in what Harv Eker wrote
to want to attend the Millionaire Mind Intensive this coming November.
This is one of those free seminars where they teach you a heap of stuff but
they probably will also promote the hell out of their products….so it’s almost
like attending a 3 day infomercial. But if you can put
the promotional stuff aside, the stuff he teaches is really worth taking
in and the book is excellent.

Apart from wanting to hear just what Harv Eker had to say, I
am really interested in finding out more about his 7 jars money system.
Financial freedom is so important and when you start receiving large amounts of
money it is very easy to just blow it, and this is something we don’t want to
do.

Below are some points I’ve learnt from reading the book:

·Pay yourself 10% first.

This is a fundamental concept and is also
mentioned in “The Richest Man in Babylon”. Unfortunately, most folks never put
this into actions. The worse of the kind
are those who already know it but never put any concrete actions into the
doing. Personally, I have been putting 10% of my active income every month into
my company’s stock purchase plan. I also planned to participate in a regular
investment plan, POSB Invest-Saver where it buys into Nikko AM Singapore STI
ETF. This simple and fool-proof strategy allows me to average up and down regardless
of market conditions.

·Clarity Is Power. Thoughts –> Emotions –> Actions = Results

There are many people who dreams of being a millionaire one
day but all these dreams can only come true with action. With a clear mindset
and goal, it will empower one with the ability to act. By simply knowing
absolutely how much is enough and by when, your financial path is all set once
clarity is formed. The rest is finding
your way towards that clear goal. For example,
“$120,000 pa residual income in 10 years’ time”.

Personally, I think the jars are very useful
principles that can be easily applied by just about anyone regardless of their
income. Here’s how it works:

(Note: The percentages shown are purely
suggestive figures. You are free to
adjust them to your needs.)

Financial
freedom jar 15% –. You never ever spend this money until you’re
financially free. Preferably, the money is invested, either by participating in
a passive investment plan such as POSB Invest-Saver or active stock picking by purchasing
undervalued stocks

I do recommend that you read “The Secrets of a Millionaire
Mind” or attend the Millionaire Mind Intensive (I know I will try to
attend by registering for the free tickets). However knowing that some people
might get swept up in the hype of the seminar and sign up for courses, I would
recommend leaving your checkbook at home so that you don’t rush into signing up
for something you may not need. Reflect on the usefulness of the courses before
deciding to sign up

Recommended Reading

§Secrets of the Millionaire Mind –
this is a must read if you want to change your money mindset. However, don’t be
put off by the promotional stuff in the book. Just look past that because this
book is invaluable for changing your money blueprint.

Saturday, October 5, 2013

Ocean Sky was first featured on this blog 6 months back as an undervalued stock (refer to article). Apparently, I am not the only one who thinks that Ocean Sky is undervalued, Ezion (a hot stock considered by many local investor) announced that they are proposing to inject its marine supply base asset into Ocean Sky at cost via a share swap. Post exercise, Ezion will hold 45.15% in Ocean Sky while the latter will have a 2% stake in Ezion. This is a strategic move to enable Ezion to tap into the growth potential of the marine supply base business in Australia without stretching its balance sheet and resources further, while allowing the company to stay focused on its core liftboat and service rigs business.

Ezion will issue 20.2m new shares @ S$2.351 per share in exchange for 440m new shares in Ocean Sky @
S$0.108 per share. In addition, Ezion will have the right to subscribe for an additional 165m shares @ S$0.108, which would raise its stake in Ocean Sky to c.50%.

Friday, October 4, 2013

Jason Zweig writes “The Intelligent Investor” column on the Wall Street Journal’s Website (WSJ.com). The edition of Benjamin Graham’s “The Intelligent Investor” book with Zweig’s commentary is considered to be the version to read. His post on "Value Stocks Are Hot—But Most Investors Will Burn Out" dated 18th February 2013 makes the most sense on why so many investors do not succeed when they take the value investing approach and I thought it would be good to share with readersSome important excerpt from the article:

"Most people aren't cut out for value investing, because human nature shrinks from pain," the money manager Jean-Marie Eveillard told me this past week. His words are a reminder thatmaking money on cheap stocks—the goal of every value investor—is harder than it sounds and can take years to play out

The fund industry has long marketed the chimera of "consistency," the idea that a great stock picker can always earn higher returns than the market. Investors who buy into this myth often sell in a panic as soon as the next crash proves that no stock picker can always outperform

Summit Street Capital Management, an investment partnership in New York, recently analyzed a group of value investors with long records of superior returns and found that even the best underperformed one-third to 40% of the time. "It's hard not to get shaken out unless you understand that and have conviction," says Summit Street partner Jennifer Wallace

To be a value investor, it isn't enough to buy cheap stocks or the funds that own them. You have to stick around until the market recognizes their worth. Mr. Eveillard, now 73 years old and an adviser to his old fund, is still finding bargains in Japan and among gold-mining stocks—but he is prepared to "suffer" until the market proves him right

The five best performing REITs since the end of 2012 have included two REITs that invest mostly in properties in Singapore, one that invests in properties in Hong Kong, one that invests in properties in Japan and one that invests mostly in properties in Indonesia, according to an My Gateway email update by the Singapore Exchange.

Total returns (including dividends) of the REITs in 2013 YTD have ranged from -11.1% for CapitaRetail China Trust to + 13.3% for Parkway Life REIT.

Real Estate Investment Trusts (REITs) invest in professionally managed real estate assets. With three new listings this year, SGX now lists 25 REITs that are governed by the Collective Investment Scheme. The 25 REITs listed on SGX are varied by the type of properties in the portfolio in addition to the location of those properties. Five invest solely in international properties while nine hold both international and Singapore real estate. There are 11 REITs that have their entire portfolio currently made of Singapore properties.

In the 2013 year thus far, the FTSE ST REIT Index has declined 1.5% on a total return basis which takes into account weighted price appreciation and dividend distributions. This has followed on from a total return of 46.2% for the 2012 year.

Attuned with the status of an Asian REITs hub, just two of the five best performing REITs since 2012 are investing mostly in Singapore properties. The five best performing REITs since 2012 include Fortune REIT which invests in residential-related properties in Hong Kong, Saizen REIT which invests in residential-related properties in Japan and First REIT that invests mostly in health care related properties in Indonesia.

Thursday, October 3, 2013

Forbes recently published an article "How Mohnish Pabrai Crushed The Market By 1100% Since 2000"
which provides glimpse on how Mohnish Pabrai uses a checklist in his investment decisions.

Mohnish Pabrai’s long-only equity fund has returned a cumulative 517% net to investors vs. 43% for the S&P 500 Index since inception in 2000. That’s outperformance of 474 percentage points or 1103 percent.

Mohnish Pabrai

Pabrai is a classic value investor in the tradition of Warren Buffett, Charlie Munger, Seth Klarman and Joel Greenblat. I recently had an opportunity to hear him talk and thought I’d pass along some of my bright yellow highlighting.

How to start investing

For Pabrai, this yellow brick road begins with Warren Buffett’s annual letters to shareholders (totaling 730 pages, now conveniently available for your Amazon Kindle for$2.99 cheap). From there he recommends the Buffett biographies (mentioning the ones by Lowenstein and Schroeder). I might add, though he didn’t, that you could do worse than to read Pabrai’s own book,The Dhando Investor.

Like Buffett, Pabrai looks at a stock not as a piece of paper but as the ownership of a business. He has no interest in a company that looks ten percent undervalued. He is angling to make five times his money in a few years. If he doesn’t think the opportunity is blindingly obvious, he passes. This requires him to apply his X-Ray vision to the fundamentals, and weigh the downside risk (the margin of safety) vs. the upside potential (the moat) at a given price. His mantra: Heads I win, tails I don’t lose much.

Next, Pabrai practices patience. He takes Charlie Munger’s admonition to heart that money is made not in the buying or selling but in the waiting. As far as I am aware, he has not made a single new investment in 2013. He says that if he can find a couple of investment ideas a year, that’s plenty. His current preference is to keep a cash store of between 10%-20%. This seems like a tremendous drag for a fund posting numbers like his, but he is really biding his time for a distressed situation to come along when he can deploy this trove at the valuation he wants. During the next crisis, when everyone is jamming the exits, he will go all in.

Once you start purchasing stocks, Pabrai says the next step is to closely examine every trade that doesn’t work, and figure out what went wrong. Let me pause right here, because this is key to his whole method.

There is nothing more tempting that to sweep mistakes under the rug. Denial is one of our top defense mechanisms. If you are lucky, these trades come to haunt your sleep like Marley’s ghost. If you are unlucky, you repress them forever.

Due to his background in engineering, Pabrai does not gloss over mistakes. Investing is a field where you can have a high error rate (buying something you shouldn’t have, selling something you shouldn’t have, not buying something you should have, not selling something you should have) and still be successful. He takes as a given that mistakes are inevitable. The point is to learn from them so they are not repeated. A major portion of his annual meeting is devoted to publicly analyzing investments where he lost money for his partners. Lately these errors are becoming harder to find, so he has been reduced to talking about investments that didn’t fare as well as expected.

The checklist

Pabrai was impressed by Atul Gawande’s Checklist Manifesto, which recounts how a technology seemingly as trivial as a checklist led to life-saving results in the airline cockpit and the operating room. He wondered whether it could work the same magic for investors.

He began by looking at the public record of the investors he admired and deconstructing the mistakes they made — cases where there were klaxons sounding even the great ones missed. He cites the example of Berkshire Hathaway’s purchase of Dexter Shoes — a New England factory with a great product used by everyone with feet. It immediately got hacked to pieces by cheap foreign labor. Hence, one checklist item: is this a business that can be negatively impacted by low-cost competition from abroad?

After this analysis, he came up with one hundred or so check boxes. He keeps it proprietary, but claims that if we were to see it, we would think it was jejuneand throw it away. I wonder. In any event, the items are grouped into categories. A lot of them have to do with leverage, for obvious reasons. A second group relates to the durability of the business’s “moat” — how difficult it is for new entrants or competitors to duplicate their product or service. A third set of questions examine the quality of the company’s management. Is the company being intelligently run for the benefit of shareholders? There is also a fourth set of miscellaneous items, such as unions and labor relations, or is the company operating with a tailwind that may be only temporary?

Yale economist Robert Shiller has noted that many of the biggest advances in financial risk control seem ridiculously modest today: the widespread availability in the 19th century of cheap paper made from wood pulp instead of cloth, the typewriter, carbon paper, the standardized form, the filing cabinet — all these made substantial improvements in the reliability of business operations.

Pabrai can can tick most of the boxes in twenty minutes, but then it gets interesting, because he realizes there are some areas — often not top-of-mind — that need more research and clarification. This is the biggest payback, because it forces a 360 degree look at risk. The human animal gets into tunnel thinking once it likes an investment idea, and this usefully stops that momentum. Since 2008, Pabrai also has started talking over his investment ideas with a peer prior to jumping in.

The checklist is doubly important for a concentrated fund like his, which might only contain ten tickers. Since he is angling for big total returns, these are usually companies in some distress to begin with — either from their own misdeeds or due to macro factors. So far, it has radically trimmed the downside tails, although it has yet to be tested in a crash landing.

Cloning

For Pabrai, investing is not an originality contest. He shamelessly appropriates the ideas of others. For example, he lifted the structure of his fund directly from the Buffett partnerships of the 1950s. His primary source of investment ideas? The 13F SEC filings from other value managers he admires: Berkshire, Longleaf, Baupost, Greenlight, Pershing Square, Third Avenue, etc. He cites the University of Nevada study by Martin and Puthenpackal showing how merely investing alongside Warren Buffett (after information about Berkshire’s buys and sells became public) managed to beat the market by 11% a year over a 31-year period.

It looks like Pabrai holds the world in a paper cup. To make matters worse, he’s also charitable, and his Dakshana Foundation is one of the best charities on the planet. While he makes it sound easy, remember that he has nerves of steel and when he does invest, he goes in with unshakable conviction. He’s willing to reach out and grab a stock falling like a dagger and then to keep buying while it plummets into the abyss. I remember seeing him in September 2008 when his fund was down 60% and the global financial system was coming off the rails. These facts bounced off him like a pea-shooter. His only concern was finding cash to buy stocks while they were still cheap.